Credit where it’s due | MIT News

When most people buy cars, the sticker price is only part of the cost. The other part involves the loan, since folks usually borrow money for auto purchases. Therefore the interest rate, monthly payment size, and total repayment cost all matter too.

And yet, on aggregate, people do more comparison shopping about car prices than about lenders, and they frequently settle for relatively expensive loans. What happens when the financing costs more? The answer is, people buy older cars with lower sticker prices.

“The car they’re driving right now could be a year older because of that,” says Christopher Palmer PhD ’14, an associate professor of finance at the MIT Sloan School of Management, who helped discover this phenomenon through a study examining millions of U.S. car loans. That research is like much of Palmer’s work: grounded in hard data and shining new light on issues, even familiar ones, about personal money management.

“I study household financial decision-making,” Palmer says. “Both how households make decisions and how those decisions are influenced by external factors. That covers a lot of things.”

It sure does. Palmer, often working with co-authors, has also discovered that people prefer to make monthly payments that are multiples of $100 — which can lead them to agree to worse financing terms. And since household finance includes housing, Palmer co-authored a high-profile study showing that people are remarkably more likely to use housing vouchers and move to another neighborhood when they have a modest amount of assistance from a “navigator” who helps with the move.

But he isn’t just looking for behavioral quirks: Another Palmer study found that the Federal Reserve’s quantitative easing efforts after the financial crisis of 2008 helped cash-strapped people refinance their mortgages — though mostly those who had been able to make a down payment of 20 percent or more in the first place.

Overall, Palmer looks at big-picture economic scenarios in which people feel a financial crunch, and at consumer behavior, especially involving credit.

“If you look at whether someone can make a monthly payment, you need to understand their labor market, their expectations for the future, and more,” Palmer says. “Credit markets are interconnected to almost everything you might care about. Part of the reason I’m trying to shine a light on consumer credit markets is that they affect all kinds of human outcomes.”

For his research and teaching, Palmer earned tenure at MIT last year.

Useful intuition

Palmer grew up in the Boston area and enjoyed math in school, while always being interested in how people made financial decisions, especially about real estate. As an undergraduate at Brigham Young University, he soon recognized that he wanted to use his math skills to analyze everyday phenomena.

“I like the way you can take your intuition and have it be useful as you work through problems, along with this element of being able to observe what’s happening around you and being a listener in the world,” Palmer says.

As a student, though, that didn’t mean Palmer narrowed his interests. If anything, he saw the value in widening his studies.

“I also pretty quickly realized in college that I wanted to double major in econ and math,” Palmer says. “And that became the pipeline to get a PhD.”

After graduating from BYU, Palmer entered the doctoral program at MIT in 2008. In addition to taking classes, he immediately started working as a research assistant on a study of rent control along with professors David Autor — his eventual advisor — and Parag Pathak. That research eventually turned into a couple of high-profile papers. But while rent control is a kind of household-finance issue, the subject of household finance wasn’t really an established subdiscipline at the time.

It soon would be, however. Indeed, Palmer’s graduate-school career is almost a case study in how academic research broadens and evolves over time. Just as Palmer enrolled at MIT, the subprime-lending implosion helped generate the financial-markets crash of 2008, and both became greater focal points for academic research. Suddenly the topics that had been percolating around in Palmer’s mind were in pressing need of academic research.

“All of a sudden mortgages and household finance were front and center,” Palmer says. “That allowed me the space to write a dissertation about how distressed income households make mortgage decisions. There was an appetite for that.”

After receiving his PhD, Palmer joined the faculty at the University of California at Berkeley, at the Haas School of Business, and then moved back to MIT in 2017.

“Household finance as a field is small, so you have to intersect it with something else if you want your question to make a difference in the world,” Palmer says. “For me, that might be macroeconomics, labor economics, corporate finance, or banking. This is partly why MIT is an amazing place to be, because it’s so easy to get exposure to all of those fields.”

Keeping a list of questions at hand

With a wide-ranging research portfolio, Palmer has to be nimble about identifying topics he can study in depth. That means looking for good data related to household finance and consumer credit, and shaping his studies around meaningful questions.

“I think a good microeconomist is always on the hunt for things,” Palmer says.

“I’ve always wanted to be question-driven,” he adds. “I try to have a list of questions in mind, so that if somebody says, ‘I have an interesting data set, what can we do with it?’ I might have ideas about what in the data we can look at.”

Take the massive study on auto loans, which arose after a co-author approached Palmer and said, more or less, that he had identified an interesting data set and was wondering what to do with it. One unresolved question was: How much do people search for the best car price or the best loan terms?

As a graduate student, Palmer recalls, “I remembered [MIT professor] Glenn Ellison once saying in class that the subject of search is a really juicy topic. Consumers face tricky decisions, and companies do not want to make it easy for people to comparison-shop. And no one had done much about search in household finance.”

So, Palmer and his colleagues based the auto-loan study partly around the search issue. The work analyzes the geographic locations of millions of buyers, and the number of lenders within 20-minute drive of them, and examines how thoroughly consumers hunt for the best deals. The study includes credit scores, auto prices, and loan terms, illuminating the complete dynamics involving credit and auto purchases. 

Best behavior

Some of Palmer’s work, meanwhile, takes the form of experiments. The paper he co-authored about what helps people move was one such case. It was set in Seattle, and the research team collaborated with local policymakers to construct an experiment on the subject.

It turns out that in Seattle, among people granted housing vouchers to move to new neighborhoods, the percentage actually utilizing the vouchers jumped from 15 percent to 53 percent — an eye-opening change — when they were given slightly more information and resources, and most of all a “navigator” helping with basic logistics.

Studying how people manage money means Palmer’s work yields plenty of insights in the mode of behavioral economics, the subfield that studies irrationalities — or lack thereof — in finance. Palmer thinks such findings are important, while emphasizing that he is not principally on a hunt for irrationality. Instead he always seeks to link the study of behavior to major economic and policy matters: how we borrow, what we can afford, and how we respond to economic stress.

“When a study of behavior is motivated by a tight connection to public policy, it satisfies the is-this-important hurdle right away,” Palmer says. “I’m always aiming to produce work that a large community of scholars would find important and that the broader world would find impactful.”

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